As a follow up to Tax Alert 2016-520 (March 17, 2016), this Alert provides additional information on the sales and use tax changes in Louisiana enacted by the legislature last week during its 2016 First Extraordinary Session.

For a discussion of the income and franchise tax changes enacted during the special session, see Tax Alert 2016-520.

Additional 1 cent sales tax (Clean Penny)

Act 26 (HB 62), which is effective beginning April 1, 2016, levies an additional 1% sales tax (i.e., Clean Penny) on certain purchases of tangible personal property or services in Louisiana. For a transaction that is not covered by any exemptions, this is expected to raise the state sales/use tax rate from 4% to 5%, exclusive of any additional local sales tax.

Act 26 enumerates 65 specific exemptions from this new 1% tax, leaving many purchases subject to the tax that were traditionally exempt from the existing 4% Louisiana state sales and use tax. Some notable exemptions include sale for resale, purchases of property for lease or rental, isolated or casual sales of tangible personal property, installation charges, and several agricultural exemptions. Sales of manufacturing machinery and equipment (MM&E) will be subject to the 1% tax from April 1, 2016 through June 30, 2016, but are exempt from this levy beginning on July 1, 2016.

Some purchases that have historically been exempt from Louisiana sales tax but are subject to the additional 1% tax include receipts from business utilities, the sale of medical devices, custom software, pollution control equipment and automobiles and certain freight charges.

Because this additional 1% tax is levied separately from the existing sales tax, and the allowable exemptions are specifically listed, the determination of taxability will vary widely based on the specific facts and circumstances of each transaction.

Finally, the "Clean Penny" extra sales tax is set to expire on June 30, 2018.

Repeal of sales tax exemptions

Act 25 (HB 61) eliminates many exemptions and exclusions from the entire 4% Louisiana state sales tax during the period from April 1, 2016 through July 1, 2016, then eliminates them from only 2% of that tax from July 2, 2016 through July 1, 2018, in effect restoring them in full after July 1, 2018. This is accomplished by specifically enumerating a set of exemptions that will be the only exemptions from the general Louisiana state sales tax allowed during these periods.

In addition to the 1% of additional tax added under the "Clean Penny", it is important to understand that Louisiana imposes its existing 4% state sales tax in three separate statutes, and the new list of exemptions, although largely similar across these statutes, is not always the same or perfectly synchronized. As a result, some transactions may only be subject to particular tax levies at particular times, and thus, the resulting total state tax rate can vary widely depending upon a particular transaction and when it occurred.

Some notable transactions that remain exempted from all state sales tax include sale for resale, further processing, and several agricultural exemptions. Purchase, use and lease of manufacturing machinery and equipment (MM&E) remains exempt from 3% of the existing sales and use tax, but will be subject to 1% of the tax from April 1, 2016 through June 30, 2018, in addition to the "Clean Penny" described above. This means that, in total, purchases of MM&E should be subject to a 2% state sales and use tax from April 1, 2016 to June 30, 2016 and a 1% state sales and use tax for the period from July 1, 2016 to June 30, 2018.

Numerous traditionally exempt purchases will now be subject to the full 4% sales tax until July1, 2016, and subsequently to 2% of the existing sales tax until July 1, 2018. Some examples include business utilities, medical devices, purchases of property other than automobiles for the purposes of leasing, isolated or occasional sales, sales for first use offshore, pollution control equipment, custom software, freight charges, and installation charges. In many cases, these same types of purchases also will be subject to the "Clean Penny."

The effective timeline of these exemption carve-outs is extremely detailed, and spans four sales tax imposition statutes. Accordingly, in conjunction with the "Clean Penny," the resulting state rate can fall anywhere from 0% to 5%, exclusive of local taxes. For administrative convenience, this Alert assumes that rate changes will apply to the end of the month, even though many of the rates are set to expire on the first day of the month. Detailed consideration of the timing and nature of each separate transaction is necessary to fully understand the effect of this bill.

Remote seller nexus

Louisiana has joined a number of states that have broadened their nexus provisions in the last few months, forcing more remote sellers to collect sales tax on their sales to Louisiana customers. Act 22 (HB 30) expands Louisiana's definition of "dealer" to include remote sellers. Effective for all tax periods beginning on and after April 1, 2016, the following activities now qualify a seller as a dealer in Louisiana:

1) Soliciting business in the state through agreements with residents paying commissions, referral fees or other consideration in return for referring customers to the business and when the gross receipts generated from such business exceed $50,000 during the preceding 12 months (note: this provision can be rebutted)

2) Selling the same or a substantially similar line of products under the same or a substantially similar name, using the same trademarks, or trade names that are similar to those used by a Louisiana retailer

3) Soliciting business and developing and maintaining a market in Louisiana through an agent, salesman, independent contractor, solicitor, or other representative under an agreement with a Louisiana resident or business (referred to as an "Affiliated Agent"), under which the Affiliated Agent is paid a commission, referral fee, or other consideration and engages in activities in Louisiana for the benefit of the person's development and maintenance of the market, such as referring potential customers, either directly or indirectly, whether by link on an internet website or otherwise

The law also creates a presumption that these provisions apply to any person holding a substantial ownership (defined as an interest greater than 5%, whether held directly or indirectly) through a subsidiary, in a retailer that maintains sales locations in Louisiana. The law also requires the dealer to collect Louisiana sales tax under La. R.S. 47:302(K), which is a tax with a rate of 4% in addition to the regular state tax rate, which is intended to provide a mechanism by which the state will to share revenues with local jurisdictions. (As a reminder, all Louisiana parishes and many local jurisdictions impose a sales tax on top of the state sales tax and many of these jurisdictions administer these local taxes separately from the state tax.) In addition, dealers under the Act would be subject to the "Clean Penny" at an additional rate of 1% for a total state rate of 9% (i.e., 1% under the "Clean Penny," 4% under the existing sales tax levy and 4% added by La. R.S. 47:302(K) to be collected by the Louisiana Department of Revenue (LDR) and remitted to the local taxing jurisdictions pro rata based on population.)

Vendor's compensation

Act 15 (HB 43) caps the amount of vendor's compensation at $1,500 per month for a dealer operating one or more business locations in Louisiana. Dealers with multiple locations in the state will still be limited to $1,500 in the aggregate. Additionally, the Act prohibits the "Clean Penny" from being considered in the calculation of vendor's compensation. This Act applies to all transactions occurring on or after April 1, 2016.

Implications

As is evident from the prior description, enactment of Acts 25 and 26 of the 2016 First Extraordinary Session will have broad effects on Louisiana's sales tax system. In many ways, these provisions will create a completely new, albeit temporary, sales tax regime in the state. Taxpayers should carefully consider the changes and evaluate the effect on their sales tax processes in Louisiana. They may find that they will have to undertake significant systems changes correct for varied and changing rates and ephemeral exemptions that exist for some portions of the overall tax but not for others. Traditional exemptions from sales available historically as well as in other states are eliminated but, in some cases, only for certain periods.

This legislation not only changed tax rates but also the base of items subject to Louisiana sales and use tax. Furthermore, there is little doubt that the haste by which this legislation was passed could lead to consequences neither the new Governor, the legislature or the LDR could have foreseen.

With many of the sales tax changes set to be implemented on April 1, 2016, taxpayers do not have much time to prepare. Moreover, tax rates will change numerous times over the next three years at varying times depending upon the exact component of the tax affected and even the magnitude of rate changes will vary widely across different transaction types. This will undoubtedly create compliance issues as taxpayers try to implement changes to their sales tax reporting and collection systems and adjust to the changes.

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